The SEC Has Proposed New Regulations for Fiduciaries

What the new code of conduct rule entails and how it could affect elderly investors

Up until earlier this year, the Department of Labor had a rule in effect for fiduciaries that specified that they couldn’t earn commissions unless the advice they offered was in the best interests of their clients. In addition, the rule mandated that they could only earn reasonable compensation and must be transparent about this compensation as well as the products they sell.

However, in March, a federal appeals court struck down the DOL’s rule. Recently the SEC proposed their own rule – called Regulation Best Interest or Reg BI – that aims to address three areas:

Disclosure – Brokers-dealers would have to disclose details of their relationships with their clients, including any potential conflicts of interest.

Diligence – In order to understand the products they recommend, firms would have to practice “reasonable diligence, care, skill, and prudence.” In addition, there has to be a reasonable belief that an investment or transaction is in the best interests of the investor.

Conflict of interest – Brokers-dealers would be required to enforce procedures that reveal possible conflicts of interest related to financial incentives and mitigate or eliminate them.

The proposed rule has so far been met with a lot of criticism from numerous people in or monitoring the financial industry, as many feel that it doesn’t go far enough to protect investors. Although Reg BI seems very similar to the DOL’s previous standard, according to the Economic Policy Institute, it is significantly weaker.

“Though it would prohibit brokers and other financial professionals from steering clients toward clearly unsuitable investments, financial professionals are already prohibited from doing so under current rules,” wrote EPI’s Monique Morrissey and Heidi Shierholz in a blog post. “While these rules prevent brokers from – say – recommending highly risky investments to risk-averse clients, they don’t prevent them from promoting higher-cost but ‘suitable’ investments when similar lower-cost investments are available.”

So, what does ‘best interests’ mean, anyway?

One of the big issues with the SEC’s proposed rule, many believe, is that the agency hasn’t defined exactly what “best interests” entail, which can open the door to a wide interpretation.

“Unfortunately, in its current form, the Commission’s proposed Reg BI does not impose a fiduciary standard and further fails to define the contours of the ‘best interest’ standard,” wrote David Certner, legislative policy director for AARP, in a letter to the SEC. “Absent a fiduciary standard, investors will continue to be vulnerable and will not receive the protections they need and deserve.”

Conflicts of interest could also be left to individual broker-dealers to define, says Joe Borg, president of the North American Securities Administrators Association. “Regulation Best Interest should explicitly prohibit certain conflicts tied to agents’ financial incentives, not merely leave it to broker-dealers to evaluate whether they have cured such conflicts through adequate disclosures and mitigative measures,” he said. Borg also believes that the SEC proposal, in its present form, “would leave broker-dealers in a position to put their own interests ahead of their clients.”

What impact could this proposed rule have on older investors?

Because seniors are often the target of financial scams – and due to the fact that by and large, this demographic has a lot of money to invest – the SEC rule could have a huge impact on them. According to the AARP, if the rule goes into effect, older investors could be subjected to bad investment advice as well as hidden fees. In addition to a more comprehensive standard, the organization is urging the SEC to simplify the process for finalizing a financial transaction to make things easier to understand.

After the SEC released their proposed rule, a comment period was open in which people could share their thoughts. The SEC website received thousands of comments, and the agency is currently reviewing them to determine if any changes need to be made before the rule goes up for a vote.

Don’t rely strictly on the government for help and support

While it seems as though the SEC may need to make some modifications to their rule, the unfortunate truth is that regardless of the final version that goes into effect, there will always be unscrupulous financial professionals eager to prey on the most vulnerable investors. If you believe you lost money due to the improper actions of a broker or advisor, the Silver Law Group may be able to help.

For a free consultation from an elder financial fraud and securities arbitration attorney, contact us.